Politics
Politics: Ripping Off Young America: The College-Loan Scandal
By Matt Taibbi
August 15, 2013 | 10:45am EDT
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Illustration by Victor Juhasz
On May 31st, president Barack Obama strolled into the bright
sunlight of the Rose Garden, covered from head to toe in the slime and
ooze of the Benghazi and IRS scandals. In a Karl Rove-ian masterstroke,
he simply pretended they weren't there and changed the subject.
More Taibbi: The Last Mystery of the Financial Crisis
The
topic? Student loans. Unless Congress took action soon, he warned, the
relatively low 3.4 percent interest rates on key federal student loans
would double. Obama knew the Republicans would make a scene over
extending the subsidized loan program, and that he could corner them
into looking like obstructionist meanies out to snatch the lollipop of
higher education from America's youth. "We cannot price the middle class
or folks who are willing to work hard to get into the middle class," he
said sternly, "out of a college education."
Flash-forward
through a few months of brinkmanship and name-calling, and not only is
nobody talking about the IRS anymore, but the Republicans and Democrats
are snuggled in bed together on the student-loan thing, having hatched a
quick-fix plan on July 31st to peg interest rates to Treasury rates,
ensuring the rate for undergrads would only rise to 3.86 percent for the
coming year.
Though this was just the thinnest of temporary
solutions – Congressional Budget Office projections predicted interest
rates on undergraduate loans under the new plan would still rise as high
as 7.25 percent within five years, while graduate loans could reach an
even more ridiculous 8.8 percent – the jobholders on Capitol Hill
couldn't stop congratulating themselves for their "rare" "feat" of
bipartisan cooperation. "This proves Washington can work," clucked House
Republican Luke Messer of Indiana, in a typically autoerotic assessment
of the work done by Beltway pols like himself who were now freed up for
their August vacations.
Not only had the president succeeded in
moving the goal posts on his spring scandals, he'd teamed up with the
Republicans to perpetuate a long-standing deception about the education
issue: that the student-loan controversy is now entirely about interest
rates and/or access to school loans.
Obama had already set
himself up as a great champion of student rights by taking on banks and
greedy lenders like Sallie Mae. Three years earlier, he'd scored what at
the time looked like a major victory over the Republicans with a
transformative plan to revamp the student-loan industry. The 2010 bill
mostly eliminated private banks and lenders from the federal
student-loan business. Henceforth, the government would lend college
money directly to students, with no middlemen taking a cut. The
president insisted the plan would eliminate waste and promised to pass
the savings along to students in the form of more college and university
loans, including $36 billion in new Pell grants over 10 years for
low-income students. Republican senator and former Secretary of
Education Lamar Alexander bashed the move as "another Washington
takeover."
The thing is, none of it – not last month's deal, not
Obama's 2010 reforms – mattered that much. No doubt, seeing rates
double permanently would genuinely have sucked for many students, so it
was nice to avoid that. And yes, it was theoretically beneficial when
Obama took banks and middlemen out of the federal student-loan game. But
the dirty secret of American higher education is that student-loan
interest rates are almost irrelevant. It's not the cost of the loan
that's the problem, it's the principal – the appallingly high tuition
costs that have been soaring at two to three times the rate of
inflation, an irrational upward trajectory eerily reminiscent of
skyrocketing housing prices in the years before 2008.
More Taibbi: The Biggest Price-Fixing Scandal Ever
How
is this happening? It's complicated. But throw off the mystery and what
you'll uncover is a shameful and oppressive outrage that for years now
has been systematically perpetrated against a generation of young
adults. For this story, I interviewed people who developed crippling
mental and physical conditions, who considered suicide, who had to give
up hope of having children, who were forced to leave the country, or who
even entered a life of crime because of their student debts.
They
all take responsibility for their own mistakes. They know they didn't
arrive at gorgeous campuses for four golden years of boozing, balling
and bong hits by way of anybody's cattle car. But they're angry, too,
and they should be. Because the underlying cause of all that later-life
distress and heartache – the reason they carry such crushing,
life-alteringly huge college debt – is that our university-tuition
system really is exploitative and unfair, designed primarily to benefit
two major actors.
First in line are the colleges and
universities, and the contractors who build their extravagant athletic
complexes, hotel-like dormitories and God knows what other campus
embellishments. For these little regional economic empires, the federal
student-loan system is essentially a massive and ongoing government
subsidy, once funded mostly by emotionally vulnerable parents, but now
increasingly paid for in the form of federally backed loans to a
political constituency – low- and middle-income students – that has
virtually no lobby in Washington.
Next up is the government
itself. While it's not commonly discussed on the Hill, the government
actually stands to make an enormous profit on the president's new
federal student-loan system, an estimated $184 billion over 10 years, a
boondoggle paid for by hyperinflated tuition costs and fueled by a
government-sponsored predatory-lending program that makes even the most
ruthless private credit-card company seem like a "Save the Panda"
charity. Why is this happening? The answer lies in a sociopathic
marriage of private-sector greed and government force that will make you
shake your head in wonder at the way modern America sucks blood out of
its young.
In the early 2000s, a thirtysomething scientist named
Alan Collinge seemed to be going places. He had graduated from USC in
1999 with a degree in aerospace engineering and landed a research job at
Caltech. Then he made a mistake: He asked for a raise, didn't get it,
lost his job and soon found himself underemployed and with no way to
repay the roughly $38,000 in loans he'd taken out to get his degree.
Collinge's
creditor, Sallie Mae, which originally had been a quasi-public
institution but, in the late Nineties, had begun transforming into a
wholly private lender, didn't answer his requests for a forbearance or a
restructuring. So in 2001, he went into default. Soon enough, his
original $38,000 loan had ballooned to more than $100,000 in debt,
thanks to fees, penalties and accrued interest. He had a job as a
military contractor, but he lost it when his employer ran a credit check
on him. His whole life was now about his student debt.
More Taibbi: The Scam Wall Street Learned From the Mafia
Collinge
became so upset that, while sitting on a buddy's couch in Tacoma,
Washington, one night in 2005 and nursing a bottle of Jack Daniel's, he
swore that he'd see Sallie Mae on 60 Minutes if it was the last thing he
did. In what has to be a first in the history of drunken bullshitting,
it actually happened. "Lo and behold, I ended up being featured on 60
Minutes within about a year," he says. In 2006, he got to tell his debt
story to Lesley Stahl for a piece on Sallie Mae's draconian lending
tactics that, curiously enough, Sallie Mae itself refused to be
interviewed for.
From that point forward, Collinge – who founded
the website StudentLoanJustice.org – became what he calls "a complaint
box for the industry." He heard thousands of horror stories from people
like himself, and over the course of many years began to wonder more and
more about one particular recurring theme, what he calls "the really
significant thing – the sticker price." Why was college so expensive?
Tuition
costs at public and private colleges were, are and have been rising
faster than just about anything in American society – health care,
energy, even housing. Between 1950 and 1970, sending a kid to a public
university cost about four percent of an American family's annual
income. Forty years later, in 2010, it accounted for 11 percent. Moody's
released statistics showing tuition and fees rising 300 percent versus
the Consumer Price Index between 1990 and 2011.
After the
mortgage crash of 2008, for instance, many states pushed through deep
cuts to their higher-education systems, but all that did was motivate
schools to raise tuition prices and seek to recoup lost state subsidies
in the form of more federal-loan money. The one thing they didn't do was
cut costs. "College spending has been going up at the same time as
prices have been going up," says Kevin Carey of the nonpartisan New
America Foundation.
This is why the issue of student-loan
interest rates pales in comparison with the larger problem of how anyone
can repay such a huge debt – the average student now leaves school
owing $27,000 – by entering an economy sluggishly jogging uphill at a
fraction of the speed of climbing education costs. "It's the unending,
gratuitous, punitive increase in prices that is driving all of this,"
says Carey.
As Collinge worked to figure out the cause of those
cost increases, he became focused on several highly disturbing,
little-discussed quirks in the student-lending industry. For instance: A
2005 Wall Street Journal story by John Hechinger showed that the
Department of Education was projecting it would actually make money on
students who defaulted on loans, and would collect on average 100
percent of the principal, plus an additional 20 percent in fees and
payments.
Hechinger's reporting would continue over the years to
be borne out in official documents. In 2010, for instance, the Obama
White House projected the default recovery rate for all forms of federal
Stafford loans (one of the most common federally backed loans for
undergraduates and graduates) to be above 122 percent. The most recent
White House projection was slightly less aggressive, predicting a
recovery rate of between 104 percent and 109 percent for Stafford loans.
When
Rolling Stone reached out to the DOE to ask for an explanation of those
numbers, we got no answer. In the past, however, the federal government
has responded to such criticisms by insisting that it doesn't make a
profit on defaults, arguing that the government incurs costs farming out
negligent accounts to collectors, and also loses even more thanks to
the opportunity cost of lost time. For instance, the government claimed
its projected recovery rate for one type of defaulted Stafford loans in
2013 to be 109.8 percent, but after factoring in collection costs, that
number drops to 95.7 percent. Factor in the additional cost of lost
time, and the "net" projected recovery rate for these Stafford loans is
81.8 percent.
Still, those recovery numbers are extremely high,
compared with, say, credit-card debt, where recovery rates of 15 percent
are not uncommon. Whether the recovery rate is 110 percent or 80
percent, it seems doubtful that losses from defaults come close to
impacting the government's bottom line, since the state continues to
project massive earnings from its student-loan program. After the latest
compromise, the 10-year revenue projection for the DOE's lending
programs is $184,715,000,000, or $715 million higher than the old
projection – underscoring the fact that the latest deal, while perhaps
rescuing students this coming year from high rates, still expects to
ding them hard down the road.
But the main question is, how is
the idea that the government might make profits on defaulted loans even
up for debate? The answer lies in the uniquely blood-draining legal
framework in which federal student loans are issued. First of all, a
high percentage of student borrowers enter into their loans having no
idea that they're signing up for a relationship as unbreakable as
herpes. Not only has Congress almost completely stripped students of
their right to disgorge their debts through bankruptcy (amazing, when
one considers that even gamblers can declare bankruptcy!), it has also
restricted the students' ability to refinance loans. Even Truth in
Lending Act requirements – which normally require lenders to fully
disclose future costs to would-be customers – don't cover certain
student loans. That student lenders can escape from such requirements is
especially pernicious, given that their pool of borrowers are typically
one step removed from being children, but the law goes further than
that and tacitly permits lenders to deceive their teenage clients.
Not
all student borrowers have access to the same information. A 2008
federal education law forced private lenders to disclose the Annual
Percentage Rate (APR) to prospective borrowers; APR is a more complex
number that often includes fees and other charges. But lenders of
federally backed student loans do not have to make the same disclosures.
"Only
a small minority of those who've been to college have been told very
simple things, like what their interest rate was," says Collinge. "A lot
of straight-up lies have been foisted on students."
Talk to any
of the 38 million Americans who have outstanding student-loan debt, and
he or she is likely to tell you a story about how a single moment in a
financial-aid office at the age of 18 or 19 – an age when most people
can barely do a load of laundry without help – ended up ruining his or
her life. "I was 19 years old," says 24-year-old Lyndsay Green, a
graduate of the University of Alabama, in a typical story. "I didn't
understand what was going on, but my mother was there. She had signed,
and now it was my turn. So I did." Six years later, she says, "I am
nearly $45,000 in debt. . . . If I had known what I was doing, I would
never have gone to college."
"Nobody sits down and explains to
you what it all means," says 24-year-old Andrew Geliebter, who took out
loans to get what he calls "a degree in bullshit"; he entered a
public-relations program at Temple University. His loan payments are now
50 percent of his gross income, leaving only about $100 a week for
groceries for his family of four.
Another debtor, a 38-year-old
attorney who suffered a pulmonary embolism and went into default as a
result, is now more than $100,000 in debt. Bedridden and fully disabled,
he accepts he will likely be in debt until his death. He asked that his
name be withheld because he doesn't want to incur the wrath of the
government by disclosing the awful punch line to his story: After he
qualified for federal disability payments in 2009, the Department of
Education quickly began garnishing $170 a month from his disability
check.
"Student-loan debt collectors have power that would make a
mobster envious" is how Sen. Elizabeth Warren put it. Collectors can
garnish everything from wages to tax returns to Social Security payments
to, yes, disability checks. Debtors can also be barred from the
military, lose professional licenses and suffer other consequences no
private lender could possibly throw at a borrower.
The upshot of
all this is that the government can essentially lend without fear,
because its strong-arm collection powers dictate that one way or
another, the money will come back. Even a very high default rate may not
dissuade the government from continuing to make mountains of credit
available to naive young people.
"If the DOE had any skin in the
game," says Collinge, "if they actually saw significant loss from
defaulted loans, they would years ago have said, 'Whoa, we need to
freeze lending,' or, 'We need to kick 100 schools out of the lending
program.'"
Turning down the credit spigot would force schools to
compete by bringing prices down. It would help to weed out crappy
schools that hawked worthless "degrees in bullshit." It would also force
prospective students to meet higher standards – not just anyone would
get student loans, which is maybe the way it should be.
But
that's not how it is. For one thing, the check on crappy schools and
sleazy "diploma mill" institutions is essentially broken thanks to a
corrupt dynamic similar to the way credit-rating agencies have failed in
the finance world. Schools must be accredited institutions to receive
tuition via federal student loans, but the accrediting agencies are
nongovernmental captives of the education industry. "The government has
outsourced its responsibilities for ensuring quality to weak, nonprofit
organizations that are essentially owned and run by existing colleges,"
says Carey.
Fly-by-night, for-profit schools can be some of the
most aggressive in lobbying for the raising of federal-loan limits. The
reason is simple – some of them subsist almost entirely on federal
loans. There's actually a law prohibiting these schools from having more
than 90 percent of their tuition income come from federally backed
loans. It would seem to amaze that any school would come even close to
depending that much on taxpayers, but Carey notes with disdain that some
schools use loopholes to go beyond the limit (for instance, loans to
servicemen are technically issued through the Department of Defense, so
they don't count toward the 90 percent figure).
Bottomless
credit equals inflated prices equals more money for colleges and
universities, more hidden taxes for the government to collect and,
perhaps most important, a bigger and more dangerous debt bomb on the
backs of the adult working population.
The stats on the latter
are now undeniable. Having passed credit cards to became the largest
pile of owed money in America outside of the real-estate market,
outstanding student debt topped $1 trillion by the end of 2011. Last
November, the New York Fed reported an amazing statistic: During just
the third quarter of 2012, non-real-estate household debt rose
nationally by 2.3 percent, or a staggering $62 billion. And an equally
staggering $42 billion of that was student-loan debt.
The
exploding-debt scenario is such a conspicuous problem that the Federal
Advisory Council – a group of bankers who advise the Federal Reserve
Board of Governors – has compared it to the mortgage crash, warning that
"recent growth in student-loan debt . . . has parallels to the housing
crisis." Agreeing with activists like Collinge, it cited a "significant
growth of subsidized lending" as a major factor in the student-debt
mess.
One final, eerie similarity to the mortgage crisis is that
while analysts on both the left and the right agree that the ballooning
student-debt mess can be blamed on too much easy credit, there is sharp
disagreement about the reason for the existence of that easy credit.
Many finance-sector analysts see the problem as being founded in
ill-considered social engineering, an unrealistic desire to put as many
kids into college as possible that mirrors the state's home-ownership
goals that many conservatives still believe fueled the mortgage crisis.
"These problems are the result of government officials pushing a social
good – i.e., broader college attendance" is how libertarian writer
Steven Greenhut put it.
Others, however, view the easy money as
the massive subsidy for an education industry, which spent between $88
million and $110 million lobbying government in each of the past six
years, and historically has spent recklessly no matter who happened to
be footing the bill – parents, states, the federal government, young
people, whomever.
Carey talks about how colleges spend a lot of
energy on what he calls "gilding" – pouring money into superficial
symbols of prestige, everything from new buildings to celebrity
professors, as part of a "never-ending race for positional status."
"What
you see is that spending on education hasn't really gone up all that
much," he says. "It's spending on things like buildings and
administration. . . . Lots and lots of people getting paid $200,000,
$300,000 a year to do . . . something."
Once upon a time, when
the economy was healthier, it was parents who paid for these excesses.
"But eventually those people ran out of money," Carey says, "so they had
to start borrowing."
If federal loan programs aren't being
swallowed up by greedy schools for expensive and useless gilding,
they're being manipulated by the federal government itself. The massive
earnings the government gets on student-loan programs amount to a crude
backdoor tax increase disguised by cynical legislators (who hesitate to
ask constituents with more powerful lobbies to help cut the deficit) as
an investment in America's youth.
"It's basically a $185 billion
tax hike on middle-income and low-income citizens and their families,"
says Warren Gunnels, senior policy adviser for Vermont's Sen. Bernie
Sanders, one of the few legislators critical of the recent congressional
student-loan compromise.
Gunnels notes with irony that a few
years ago, when Obama moved to eliminate private-lender middlemen from
the servicing of federally backed loans, much hay was made out of the
enormous profits private industry had long earned on the backs of
students. The Congressional Budget Office issued a report estimating
that Obama's program would save $86.8 billion over a 10-year period by
eliminating private profits from the system. Obama said taxpayers were
"paying banks a premium to act as middlemen," adding that it was a
"premium we cannot afford."
The outrage over profits, however, was short-lived.
"It
was wrong when banks were making an $86 billion profit on students, but
somehow it's OK when the government makes a $185 billion profit on
them," says Gunnels.
One of the reasons the money has kept
flying out the government's door over the years is that data about
student-loan-default rates has been carefully concealed from the public
and from Congress. For years, when it reported statistics about student
defaults, the DOE relied upon a preposterous arbitrary calculation
called the "cohort default rate," which essentially measured the rate of
default only within the first two years of graduation. In 2008,
Congress passed a law forcing the DOE to switch to a theoretically more
accurate three-year measurement, which it sent to Congress for the first
time last year. Overnight, the picture looked a good bit grimmer. The
2009 number, based on the old two-year 2009 "cohort" rate, was 8.8
percent. When the new three-year number came out, the rate had jumped to
13.4 percent.
The Department of Education refuses to release
more accurate default numbers. But outsiders think the DOE is lowballing
it. The Chronicle of Higher Education charges that the government
"vastly undercounts defaults." In 2010, it estimated that one in five
had defaulted on their loans since 1995, that 31 percent of
community-college students default and that an astonishing 40 percent of
students attending for-profit schools end up defaulting. A report by
the Inspector General of the Department of Education has come to similar
conclusions about the reliability of the absurd and arbitrary "cohort"
figure.
However high that default number really is, what's clear
is that the state is still able to turn billions in profit on its
lending, and expects to continue to do so for the next 10 years. The
reason for that, again, lies in something everyone who has a student
loan understands implicitly – the state and its collectors are not
-squeamish collecting the money they're owed. The government is in the
pain business, and business is good.
"They called me at work,
sometimes two to three times a day, doing all the stuff they aren't
supposed to do: threats, et cetera," says 41-year-old Shawn FitzGerald,
who owes $300 a month and says he expects to be paying off education
loans into his sixties. "They told the receptionist at my job that I was
in legal trouble. . . ."
"Sallie Mae has started sending
letters to my deceased mother," says Thomas Daggett of Chesterfield,
Massachusetts, who left school in the Nineties and owes $35,000.
"I
have been told I made the wrong decision going to college, as well as
being told I was a failure, an idiot and a mooch," says Larissa, a young
woman from a blue-collar town outside Chicago. "I've had ex-boyfriends
that I never even lived with contacted by collection agents, my
childhood friend's distant relatives contacted by them, as well as
distant relatives of my own. . . ."
"I try not to look at the
balances because the prospect of paying them off with my shit salary is
so goddamn depressing it makes me want to chug vodka until I pass out,"
says Robert Boardman, a proud but underemployed owner of a doctorate
from the University of Michigan.
There's a particularly dark
twist to the education story, which is tied to the collapse of the
middle class and the overall shittening of our economic landscape:
College degrees are actually considered to be more essential than ever.
The New York Times did a story earlier this year declaring the college
degree to be the "new high school diploma," describing it as essentially
a minimum job requirement. They found an Atlanta law firm that requires
even clerks, secretaries and runners to have four-year degrees and
cited research that everyone from hygienists to cargo agents needs to
have graduated from college to get hired.
You can look at this
development in one of two ways. One way is to see a college degree as a
better investment than ever, which was the conclusion of the
Organization for Economic Cooperation and Development, which noted that
the difference in earnings between the poorly and well-educated has
risen in recent years with the worsening economy.
But another
way to look at this new truth is that, because of the poor job market,
young people may have less of a chance than ever to actually get a good
job commensurate with their education. If they don't have the degree,
then they have no chance at all. So if they even want a clerking job,
they must dive face-first into the debt muck and take their chances that
they won't end up watching the federal government take bites out of
disability checks while their law degree gathers dust downstairs
somewhere. So, yes, a college education is a great thing, and you
probably need one now more than ever – the problem is that it may very
well be mandatory, may have less of a chance of ever getting you a job,
and you may still be paying for it on your deathbed no matter what.
There
are powerful reasons for both the left and the right to be willfully
blind to the root problem. Democrats – who, incidentally, receive at
least twice as much money from the education lobby as Republicans – like
to see the raging river of free-flowing student loans as a triumph of
educational access. Any suggestion that saddling befuddled youngsters
with tens of thousands of dollars in school debts is somehow harmful or
counterproductive to society is often swiftly shot down by politicians
or industry insiders as an anti-student position. The idea that
limitless government credit might be at least enabling high education
costs tends to be derisively described as the "Bennett hypothesis,"
since right-wing moralist and notorious gambler/dick/hypocrite Bill
Bennett once touted the same idea.
"It is wrong to suggest that
student aid is a cause for growing college costs, in any sector," David
Warren, president of the National Association of Independent Colleges
and Universities, wrote in The Washington Post last year, bemoaning the
"re-emergence" of the Bennett theory. "To argue so is counterproductive
to the goal of making higher education accessible and affordable."
Conservatives,
meanwhile, with their usual "Fuck everybody who complains about
anything unless it's us" mentality, tend to portray the student-loan
"problem" as a bunch of spoiled, irresponsible losers who are simply
whining about having to pay back money they borrowed with their eyes
wide open. When Yale and Penn State recently began suing students who
were defaulting on their federal Perkins loans, a Cato Institute analyst
named Neal McCluskey pretty much summed up the conservative take. "You
could take a job at Subway or wherever to pay the bills," he said. "It
seems like basic responsibility to me."
But conservatives most
of all should hate the current system for any number of reasons – for
being a massive hidden tax, for being a market-defying subsidy
artificially keeping ineffective and poor-performing institutions in
business, and for being an example of arbitrary government power seizing
not just money borrowed plus interest, but billions in additional fees
and penalties from ordinary people.
Progressives should hate the
predatory tactics of lenders and the sleazy way universities rely upon
loan-shark collection methods to keep themselves in fancy new
waterfalls, swimming pools and tenure-track jobs.
But nobody
hates it enough, except for the people actually trying to pay the bills
with increasingly worthless degrees. Instead, the credit keeps flowing
and the debt bubble keeps expanding, thanks to leaders like John Boehner
(whose daughter reportedly works at Sallie Mae's student-collections
firm, General Revenue Corp.) and Dianne Feinstein (who introduced
legislation to increase limits on Pell grants while her husband was
heavily invested in for-profit colleges).
In a way, America
itself is violating the Truth in Lending Act. It's cheering millions of
high school graduates toward college every year, feeding them into the
debt grinder under the banner of increased opportunity, when full
disclosure would require admitting that there isn't a hell of a lot
waiting for them on the other side, where the middle class has nearly
vanished and full employment is going the way of the dodo.
We're
doing the worst thing people can do: lying to our young. Nobody, not
even this president, who was swept to victory in large part by the raw
enthusiasm of college kids, has the stones to tell the truth: that a lot
of them will end up being pawns in a predatory con game designed to
extract the equivalent of home-mortgage commitment from 17-year-olds
dreaming of impossible careers as nautical archaeologists or orchestra
conductors. One former law student I contacted for this story had a
nervous breakdown while struggling to pay off six-figure debt. It wasn't
until he tapped into one of the few growth industries open to young
Americans that his outlook brightened. "I got my life back on track by
working for a marijuana delivery service in Manhattan," he says. "I've
had to compromise who I am . . . because I started down a path that I
couldn't turn away from. Student loans aren't hope. They're despair."
This story is from the August 29th, 2013 issue of Rolling Stone.
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